investment grade government issue in Southeast Asia since the Philippine issue in April 1998.
The bonds, with a spread of 4.35 per cent above US treasuries, carried a ‘BB+’ foreign cur-
rency rating from Standard & Poor’s.
The performance of the Estrada administration did not live up to its promise. Foreign
direct investment was slow to recover from the regional economic crisis, partly because of the
perception that Estrada was surrounding himself with advisers and friends, and allowing a
return to the kind of cronyism seen in the days of Marcos. The anticipated sales of govern-
ment corporations did not occur.
Estrada was forced out of office in January 2001 as a result of a scandal involving ille-
gal gambling receipts and the acceptance of diverted taxes. He was replaced by Gloria
Macapagal Arroyo, the independently elected vice president and daughter of a former presi-
dent. Among the problems Arroyo had to address were the reduction in electronic product
exports because of falling imports of electronic components from other Asian countries;
reduced demand for exports from principal markets, such as the United States; the growing
budget deficit inherited from Estrada; and chronic problems such as a feeble tax collection
system and a poor infrastructure in areas such as roads, ports and railways. The successful
passage of the Electric Power Industry Reform Act of 2001 enhanced the reputation of
Arroyo’s government for getting things done.
The New People’s Army (NPA), a paramilitary revolutionary group, has long been active
in parts of Quezon province, including the region where the project is located. During project
construction persons who identified themselves as representatives of the NPA contacted the
company to demand ‘revolutionary taxes’. Believing that similar demands had been made of
other development projects in the region, Quezon Power’s management coordinated its reac-
tion to these demands with the Philippine authorities, the US Embassy in Manila and private
security consultants. In general problems with the NPA are far less serious than those that the
Philippine government faces with Muslim secessionist and terrorist elements in the country’s
southernmost island of Mindanao.
Country credit ratings
In May 1997, shortly before the Quezon Power bonds were issued, Moody’s upgraded its sov-
ereign credit rating for Philippine foreign currency debt and bank deposits from ‘Ba2’ to
‘Ba1’, one notch below investment grade, based on continued implementation of structural
reforms, considerable adjustment in fiscal accounts, a five-year expansion of economic activ-
ity and a relatively sound banking system. The agency noted that favourable economic
growth in the medium term would depend on the country’s ability to complete the final stage
of a tax reform programme, increase domestic savings, maintain an appropriate tight mone-
tary policy, and contain trade and current account deficits. Standard & Poor’s upgraded the
country’s foreign currency rating from ‘BB’ to ‘BB+’ at about the same time.
During the period of instability under Estrada Moody’s had downgraded the Philippines to a
foreign currency rating of ‘Ba2’, while Standard & Poor’s downgraded it to ‘BB’. In 2001, with
positive signs from Arroyo’s government, these were upgraded to ‘Ba1’ and ‘BB+’, respectively.
Project credit ratings
In July 1997, when the financing closed, the senior secured bonds were rated ‘Ba1’ by
QUEZON POWER, THE PHILIPPINES